IRD Subject to SE tax or not?

[michaelmars]

dad was receiving an informal retirement payout [gift from company] dad reported on sch c and paid tax and se tax.

dad dies and son gets the next 10 years worth of payouts in a lump sum, reported on a 1099-misc box 7. Does the son pay SE tax on this amount?

[NECPA in NEBRASKA]

I would say no, because the son was not self-employed.

[mcb39]

Kind of like the no penalty on an inherited IRA??? He surely shouldn't have to pay SE tax on it.

[michaelmars]

but the father would have if he were alive. this is an extension return so i can re-address it later on

[OldJack]

I would say yes. The son is not receiving an inheritance, rather it is IRD and subject to the same tax treatment as was in the hands of his father. Code Sec. 691(a)(3).

[jainen]

>>it is IRD and subject to the same tax treatment... Code Sec. 691(a)(3)<<

I promised myself not to look up any tax code today, but I don't think it's true. IRD retains its "character," i.e., ordinary income or capital gain. But what TAX it may be subject to depends on the taxpayer. SE tax is a personal matter that can't even be allocated to a spouse in community property states. Suppose the heir had been a corporation or charity? I have a client who receives insurance residuals from policies her late husband had written, but it is not earned income for her. An even better example is royalty payment for books--Schedule C for the author, Schedule E for the heir.

Speaking of self employment, I'd better get my own return on extension before the electrical grid blacks out.

[kcjenkins]

I agree with Jainen, it is not SE income to the son.

[michaelmars]

I agree with Jainen, it is not SE income to the son.

this is where i was leaning to but what about the fact that the company had no obligation to pay it, does that change the charactor of the income?

[kcjenkins]

No, that just strengths the reasoning, if anything.

[OldJack]

>>it is IRD and subject to the same tax treatment... Code Sec. 691(a)(3)<<

I promised myself not to look up any tax code today, but I don't think it's true. IRD retains its "character," i.e., ordinary income or capital gain.

>>(3) Character of income determined by reference to decedent

The right, described in paragraph (1), to receive an amount

shall be treated, in the hands of the estate of the decedent or

any person who acquired such right by reason of the death of the

decedent, or by bequest, devise, or inheritance from the

decedent, as if it had been acquired by the estate or such person

in the transaction in which the right to receive the income was

originally derived and the amount includible in gross income

under paragraph (1) or (2) shall be considered in the hands of

the estate or such person to have the character which it would

have had in the hands of the decedent if the decedent had lived

and received such amount.

<<

Its pretty clear when it says "in the hands of the decedent if the decedent had lived and received such amount". You can justify in your own mind that character only means ordinary verses capital, but that doesn't make it so.

[michaelmars]

but the real question is, is it even income to the son?

[jainen]

>>Its pretty clear when it says... <<

Dag blangit, OldJack! You got me so worked up, and I was feeling charitable anyway to know that for the first time in my life I am actually part of the federal debt, I decided to take you at your word and check out the bona fides of your citation. Before I could say "Rapid Refund" I was lost in some judge's meandering thoughts as to whether there even is such a thing as IRD described anywhere in the law, and whether it means just whatever was owed on the date of death or whatever might come in later. The question of what tax might apply if it did exist, seemed beyond a distant horizon.

So let's split the difference. I'll agree that the son has to pay SE tax on those earnings, if you will agree that any other heir, such as a 501c(3) corporation, would equally be required to pay SE tax.

[OldJack]

So let's split the difference. I'll agree that the son has to pay SE tax on those earnings, if you will agree that any other heir, such as a 501c(3) corporation, would equally be required to pay SE tax.

Well damned if we don't agree to disagree again! Thats why we have got along for so many years. Sounds like you agree to the classification of "earnings". I have no idea what a 501c3 would do with such a situation. I expect they would ignore it like I might consider if I was the taxpayer's preparer. Its not likely the IRS would know what to do either.

[jainen]

>>Its not likely the IRS would know what to do either. <<

Well, I don't know for sure about that, but I'm absolutely certain that Tax Court doesn't have a clue.

Now leave me alone. I'm on holiday.